Chorus of Progressive Economists: Govt. Must Spur Demand to End Recession

Roger Bybee September 17, 2010

Then-presidential candidate Barack Obama greets former Labor Secretary Robert Reich (C) and others during a meeting with some of his top economic advisers on July 28, 2008, in Washington, D.C.

Large­ly obliv­i­ous to the real­i­ty among work­ing fam­i­lies grap­pling with unem­ploy­ment and wage cuts, and try­ing to avoid fore­clo­sures, con­ser­v­a­tive politi­cians (most­ly GOP, but also a con­sid­er­able num­ber of Democ­rats) are build­ing momen­tum for an assault on fed­er­al bud­get deficits by slash­ing gov­ern­ment spending.

But more than 300 econ­o­mists have coun­tered with a strong state­ment call­ing instead for the oppo­site solu­tion: a vig­or­ous expan­sion of fed­er­al stim­u­lus efforts — and the deficit — to lift the econ­o­my out of the per­sist­ing Great Recession.

The deficit focus risks repeat­ing the mis­takes of1937, when FDR pulled back on pub­lic spend­ing and plunged us back into the depths of a very deep reces­sion,” for­mer Labor Sec­re­tary Robert Reich told reporters Thurs­day on a nation­al con­fer­ence call with sev­er­al of the country’s most promi­nent pro­gres­sive econ­o­mists. We’re in dan­ger of defla­tion, con­tin­ued reces­sion, and not get­ting out of this recession.”

The eco­nom­ic recov­ery is any­thing but vig­or­ous, as shown by a weak 1.6% lev­el of growth dur­ing the sec­ond quar­ter and a rise in pover­ty, which now afflicts 43 mil­lion peo­ple, the high­est lev­el in a half-cen­tu­ry. Oth­er fun­da­men­tal prob­lems remain, the econ­o­mists point out:

The basic prob­lem is a lack of demand,” argued econ­o­mist Dean Bak­er of the Cen­ter on Eco­nom­ic and Pol­i­cy Research, and author most recent­ly of Plun­der and Blun­der. Yet it is strik­ing that we’ve had a dom­i­nant nar­ra­tive that’s 180 degrees at odds with real­i­ty.” As the econ­o­mists wrote:

Today, the econ­o­my is grow­ing only weak­ly. 7.8 mil­lion jobs have been lost in the reces­sion. Con­sumers, hav­ing suf­fered loss­es in home val­ues and retire­ment sav­ings, are tight­en­ing their belts. The busi­ness sec­tor, uncer­tain about con­sumer spend­ing, is reluc­tant to invest in expan­sion or job cre­ation, leav­ing the econ­o­my trapped on a path of slow growth or stag­na­tion. Over 20 mil­lion Amer­i­can work­ers are now unem­ployed, under­em­ployed or sim­ply have giv­en up look­ing for a job.

The increase in deficits and long-term fed­er­al debt is hard­ly due to anti-reces­sion­ary spend­ing, explained Baker.

REAL ROOTS OF DEFICIT

The largest por­tion of the fed­er­al debt is due to unfund­ed tax cuts and two wars enact­ed dur­ing the George W. Bush admin­is­tra­tion, Bak­er not­ed. Pres­i­dent Obama’s $787 bil­lion stim­u­lus plan and oth­er ini­tia­tives com­prise only a frac­tion of the red ink, but they weren’t suf­fi­cient to gen­er­ate enough con­sumer demand to escape the recession.

Emer­gency stim­u­lus poli­cies here and around the world broke the fall, but brought us only part way to full recov­ery,” the econ­o­mists declared.

The push for dras­tic deficit-cut­ting flies in the face of log­ic and the hard-learned lessons of the 1930’s, the state­ment read:

His­to­ry sug­gests that a ten­u­ous recov­ery is no time to prac­tice aus­ter­i­ty. In the Great Depres­sion, Franklin Roosevelt’s New Deal gen­er­at­ed growth and reduced the unem­ploy­ment rate from 25 per­cent in 1932 to less than 10 per­cent in 1937

How­ev­er, the deficit hawks of that era per­suad­ed Pres­i­dent Roo­sevelt to reverse course pre­ma­ture­ly and move toward bud­get bal­ance. The result was a severe reces­sion that caused the econ­o­my to con­tract sharply and sent the unem­ploy­ment rate soar­ing. Only the much larg­er wartime spend­ing of the ear­ly 1940s pro­duced a full recovery.

Aus­ter­i­ty eco­nom­ics” will not pro­vide the lev­el of con­sumer demand need­ed to rekin­dle the econ­o­my and bring down unem­ploy­ment, the econ­o­mists argue.

There are four sources of demand for busi­ness,” explained Reich. The first are con­sumers, who are buried in debt. Sec­ond, there is busi­ness, which is sit­ting on more than a tril­lion dol­lars in prof­its but not plow­ing it back into new machin­ery and not hir­ing because they don’t see the cus­tomers.” Exports, anoth­er demand source, offer lim­it­ed hope, as oth­er advanced nations are also in a slump…

ONLY GOV­ERN­MENT CAN BOL­STER DEMAND

Final­ly, there is gov­ern­ment as a con­sumer, when all else fails,” Reich said.

Pres­i­dent Oba­ma has tak­en some steps in the right direc­tion recent­ly to pre­vent lay­offs and ser­vice cuts in the pub­lic sec­tor and to aid small busi­ness­es, but needs to act much more bold­ly, said Robert Borosage, pres­i­dent of the Insti­tute for America’s Future. Borosage urged a vast expan­sion of stim­u­lus and pub­lic sec­tor job-cre­ation pro­grams, espe­cial­ly for young peo­ple cou­pled with tax cuts for all but the rich­est 3%.

Demo­c­ra­t­ic deficit hawks” should rec­og­nize that defer­ring the prob­lems of pro­longed high unem­ploy­ment and weak con­sumer demand will play direct­ly into the Repub­li­cans’ hands. The Democ­rats who are wor­ried about the deficit need to remem­ber that the Repub­li­cans are not averse to see­ing a bad econ­o­my going into the next elec­tion, because it’s not in their polit­i­cal self-inter­est,” Reich stat­ed.

Not only is a choice of trim­ming the deficit over stim­u­lat­ing the econ­o­my bad pol­i­tics, but it is bad pol­i­cy, argued Reich. Democ­rats must under­stand that gov­ern­ment has respon­si­bil­i­ty but oppor­tu­ni­ty, with low inter­est rates, to rebuild the nation’s infra­struc­ture. … If we wait to rebuild the infra­struc­ture, we will face much a high­er bill to repair it lat­er on.”

Robert Kut­tner, co-founder of The Amer­i­can Prospect and author of A Pres­i­den­cy in Per­il, said that the nation faced a choice between a high road to recov­ery or a low road to fis­cal balance.”

RECOV­ERY BEFORE TACK­LING DEFICIT

We need the prop­er sequenc­ing: first, recov­ery via ade­quate stim­u­lus and job cre­ation pro­grams. And then we can go to work on the deficit with much low­er unem­ploy­ment and much less need for the gov­ern­ment to spend. The idea that we can belt-tight­en our way to recov­ery defies every proven the­o­ry in eco­nom­ics,” Kut­tner stressed.

Even the most valu­able forms of gov­ern­ment spend­ing are com­ing into the gun sights of con­ser­v­a­tives, the experts not­ed. Tere­sa Ghi­lar­duc­ci, author of When I’m 64: The Plot Against Pen­sions, out­lined how Social Secu­ri­ty — once under attack from the Right, as in Rep. Paul Ryan’s (R‑Wis.) Roadmap for Amer­i­ca” — is pre­vent­ing the cur­rent down­turn from grow­ing much worse.

Social Secu­ri­ty ben­e­fit increas­es are more nec­es­sary than ever because of the col­lapse of the pri­vate pen­sion sys­tem,” as the shrink­age of union strength has allowed employ­ers to switch, with fed­er­al sub­si­dies, to less-expen­sive 401(k) plans that pro­vide a small­er and much more unre­li­able source of retire­ment income.

With the pen­sion sys­tem weak­ened for work­ers, Social Security’s role has been crit­i­cal dur­ing the present cri­sis. The program’s exis­tence has held down unem­ploy­ment by allow­ing old­er work­ers to retire rather than con­tin­ue in the job mar­ket. It has also bol­stered con­sumer demand, she said.

But because of the Right’s long­stand­ing ide­o­log­i­cal hos­til­i­ty to all forms of social insur­ance,” as Kut­tner put it, Social Secu­ri­ty is under attack again, includ­ing recent barbs by the for­mer Sen. Alan Simp­son, co-chair of the Nation­al Com­mis­sion on Fis­cal Respon­si­bil­i­ty and Reform.

Mean­while, the Repub­li­cans are eager­ly yank­ing the cords on their chain­saws, hop­ing that the Nov. 2 midterm elec­tions will allow them to start lop­ping off $100 bil­lion in domes­tic spend­ing, which Minor­i­ty Leader John Boehn­er recent­ly declared as the GOP’s goal.

The Repub­li­can approach to deficit cut­ting is cer­tain to extin­guish any hope of eco­nom­ic recov­ery, blunt­ly declared Dean Baker.

Roger Bybee is a Mil­wau­kee-based free­lance writer and Uni­ver­si­ty of Illi­nois vis­it­ing pro­fes­sor in Labor Edu­ca­tion.Roger’s work has appeared in numer­ous nation­al pub­li­ca­tions, includ­ing Z mag­a­zine, Dol­lars & Sense, The Pro­gres­sive, Pro­gres­sive Pop­ulist, Huff­in­g­ton Post, The Amer­i­can Prospect, Yes! and For­eign Pol­i­cy in Focus.More of his work can be found at zcom​mu​ni​ca​tions​.org/​z​s​p​a​c​e​/​r​o​g​e​r​d​bybee.
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